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EU ministers strive to find bridge to banking union

Europe’s drive towards banking union remained mired on Friday in German objections over how to handle struggling lenders, as EU finance ministers attempted to bridge differences over who should pay for financial failure.

Ministers meeting in Brussels issued a joint declaration to show they would stand behind weak banks exposed by an EU-wide stress test next year – through “haircuts” of creditors, national public backstops and, as a last resort, eurozone rescue funds.

However, the statement left unanswered the biggest question over the response to next year’s European Central Bank health check of banks: whether Germany would willingly unlock Eurozone rescue funds and whether it would come with conditions such as imposing losses on senior bank bondholders.

In addition, little progress was made to narrow the significant differences over medium-term plans for a single bank resolution system and fund, which would come into force after the stress tests are complete.

EU officials said the tone of interventions from Wolfgang Schauble, the German finance minister, were more encouraging, suggesting a deal was within reach this year.

The talks broke up early, given the slim prospect of making significant progress at this point. Before the meeting started, Jeroen Dijsselbloem, the Dutch finance minister, said it would be “more like an exchange of opinions”, adding: “As long as there is no government in Germany, I don’t see progress.”

Berlin is still adamant in opposing the European Commission’s plan for a central fund to cover bank failure in the Eurozone, saying it is based on a flimsy legal basis that will be vulnerable to a challenge in the courts.

Germany is, however, showing more openness to a central system for deciding when to close a bank, although it wants the final say to be with the council of finance ministers, rather than the European Commission.

German demands that might form part of a compromise deal include moving forward the planned date for bail-in of senior bondholders in banks from 2018 to 2015 — a move resisted by France — and effectively excluding small banks from the resolution system.

Michel Barnier, the EU commissioner responsible for the reforms, said all banks must be covered to ensure “the credibility of the new system” and match it up with the ECB’s supervision regime, which can extend to small banks judged to be in difficulty.

In the declaration on backstops for next year’s bank stress tests, member states pledged to “prepare specific and ambitious strategies” for restructuring banks, including through passing national laws to allow losses to be imposed on junior creditors.

“These strategies will privilege private sector solutions and provide equal terms for cross-border and domestic mergers and acquisitions,” the statement added.

The Eurozone’s €500b rescue fund, the European Stability Mechanism, is available if the national resources of a eurozone country are insufficient to cover any holes exposed by the tests.

The use of the fund is contingent on approval from Germany and other creditor countries wary of underwriting other states’ banks. After the meeting, Mr Schauble cast doubt on the ESM buying direct stakes in failing banks. He has previously told finance ministers that he would expect senior creditors to face losses before the ESM extends loans to countries wanting to recapitalise banks.